48 Asian Legal Business | December 2024 Commercial Disputes Constructing Effective Dispute Resolution Clauses to Address Potential Conflicts In commercial transactions, contracting parties typically first draft and negotiate substantive rights and obligations before finalizing dispute resolution clauses. However, in dispute resolution process, lawyers and adjudicators often prioritize procedural matters before substance, making dispute resolution clauses a key determinant of the process. Such clauses, shaped through party negotiation, can act as a sword for the plaintiff or a shield for the defendant; thus, the "best" dispute resolution method cannot be determined in isolation from party interests. This article discusses how to draft "effective" dispute resolution clauses from a standpoint of fair and efficient conflict resolution. I. Considerations in Drafting Dispute Resolution Clauses Dispute resolution methods mainly include litigation, arbitration, mediation, and other forms, such as compulsory execution notarization. Among these, only litigation and arbitration are mutually exclusive, requiring a choice within the clause. The following outlines factors in selecting litigation or arbitration: 1. Fact-Finding: Fact-finding is the fundamental basis for determining the outcome of a dispute. Litigation provides various methods for fact-finding, such as attorney investigation orders, inquiries and addition of a third party. Although we note that Shanghai has established a system where courts issue investigation orders for arbitration institutions, enhancing their evidence-gathering capabilities, and Guangdong Province is also exploring this with successful case, most arbitration tribunals still largely rely on the parties' evidence for fact-finding. 2. Application of Law: The application of law is a crucial basis for the resolution of disputes. Judicial practice in China reflects the state's economic policy and pursuit of justice, sometimes limiting parties' autonomy in contract validity, interest rate adjustments, liquidated damages and other matters.. 3. Efficiency: Efficiency is valued in commercial settings. Litigation can require two trials or even retrial, and with heavy court caseloads, proceedings are often prolonged. Arbitration, with its one single and final award system, can theoretically resolve disputes swiftly. However, rapid growth in domestic arbitration cases—607,000 handled in 2023—has led to overburdened institutions. Uneven development among arbitration institutions and limited constraints over arbitrators regarding awards that exceed the time limits for adjudication, can also result in some cases remaining unresolved for years. 4. Cost: Cost is a key concern for parties in dispute resolution. Litigation generally incurs lower costs due to prepayment requirements and a refund policy upon winning. Arbitration is more costly, and parties bear the risk of not recovering arbitration fees even after enforcement. 5. Confidentiality: Litigation is public by default, while arbitration prioritizes confidentiality. 6. Enforceability: Domestically, judgments, arbitral awards, and court-confirmed mediation agreements are equally enforceable. Internationally, arbitration awards have broader enforceability due to international conventions. 7. Location of Dispute Resolution: Whether in litigation or arbitration, contracting parties often prefer to select a jurisdictional authority in their own country, region, or city for convenience. II. Choice of Dispute Resolution Clauses in Specific Scenarios and Case Types 1. Arbitration for Cross-Border Transactions: In cross-border transactions, arbitration is preferable due to its enforceability. Arbitral awards are widely recognized internationally under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, allowing awards made in contracting states to be enforceable in other contracting states. Thus, arbitration should be prioritized for cross-border transactions. 2. Litigation for Cases Dependent on Third-Party Assistance for Damage Assessment Arbitration typically only includes contractual parties, and China’s Arbitration Law lacks a clear provision for third-party involvement. In cases requiring third-party cooperation—such as "back-to-back" settlements, finance-based trade, asset 运用有效的争议解决条款应对潜在冲突
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